ON FEBRUARY 4, 2018, RH ADOPTED ASU 2014-09 (TOPIC 606) REVENUE
RECOGNITION ACCOUNTING STANDARD. THE COMPANY’S PREVIOUS AND CURRENT
GUIDANCE CONFORMS TO THE NEW POLICY. WHILE TOPIC 606 HAS NO MATERIAL
IMPACT ON THE COMPANY’S FINANCIAL RESULTS FOR FISCAL 2018, WE HAVE
PROVIDED A TABLE SHOWING THE ESTIMATED EFFECT BY QUARTER BELOW.

To Our People, Partners and Shareholders,

We articulated at the beginning of the year that we will be managing the
business with a bias for earnings versus revenue growth in fiscal 2018.
We will restrain ourselves from chasing low quality sales at the expense
of profitability like many in our industry, and instead focus on
building an operating platform that will enable us to compete and win
over the long-term.

Our first quarter adjusted diluted earnings per share of $1.33 versus
$0.05 last year reflects that focus and demonstrates the power of our
new membership model, our unique and proprietary product offering, our
efforts to revolutionize physical retailing, and our work designing a
massively more efficient operating platform.

We achieved record adjusted operating margins of 9.6% in the first
quarter versus 1.5% last year, more than double our previous Q1 record
of 4.4% in the first quarter of fiscal 2015 when adjusted operating
margins reached an all-time high of 9.7% for the full year.

Adjusted gross margins increased 750 basis points to a first quarter
record of 38.0%, compared to 30.5% last year reflecting strong full
price selling, lower outlet revenues, and a more streamlined
distribution and reverse logistics network.

First quarter adjusted net income reached $33.5 million versus $1.8
million last year, and up more than three times our previous record of
$9.8 million in the first quarter of fiscal 2015.

While first quarter net revenues of $557 million decreased 0.8% as a
result of cycling the approximate 4 points of revenue drag from SKU
rationalization, and a 2 point drag from incremental outlet sales last
year, adjusted gross margin dollars increased 23.5% versus a year ago
demonstrating the true underlying strength of our business.

Our work this past year to consolidate our distribution center network
from four facilities to two while streamlining operations throughout our
supply chain, has resulted in a significantly more efficient cost and
working capital model. We believe this new model will prove to be a
long-term competitive advantage that will separate and distinguish RH’s
operating results for years to come.

As a result of our strong first quarter
performance and accelerating revenue trends in the second quarter, we
are raising our fiscal 2018 guidance for a second time this year.We
are providing the following updated guidance for fiscal 2018:

Adjusted gross margin in the range of 39.3% to 39.6% and adjusted SG&A
as a percentage of revenue in the range of 28.6% to 28.9%.

Adjusted operating margin in the range of 10.4% - 11.0%.

Adjusted net income in the range of $168 - $181 million versus our
previous range of $145 - $165 million.

Adjusted diluted earnings per share in the range of $6.34 - $6.83
based on a fully diluted share count of 26.5 million shares.

Net capital expenditures in the range of $75 million to $85 million.

Merchandise inventories in the range of $450 to $475 million, down 10%
to 15% versus last year.

Free cash flow in excess of $260 million versus previous guidance for
free cash flow in excess of $250 million.

We are providing the following guidance for the
second quarter:

Adjusted net revenues in the range of $655 - $662 million, an increase
of 6% - 7% versus last year.

Adjusted gross margin in the range of 40.5% to 40.7% and adjusted SG&A
as a percentage of revenue in the range of 29.6% to 29.8%.

Adjusted operating margin in the range of 10.8% - 11.1%.

Adjusted net income in the range of $45 - $47 million.

Adjusted diluted earnings per share in the range of $1.70 - $1.77
based on a fully diluted share count of 26.5 million shares.

Last quarter, we introduced an Intermediate and Long-Term Outlook with
expectations for accelerated revenue growth and continued margin
expansion with line of sight to adjusted operating margins in the
low-to-mid teens by 2021.

Based on investor feedback we are providing the
following margin and leverage opportunities that would bridge to
low-to-mid teens adjusted operating margins by Fiscal 2021:

Additionally, we are updating our long-term targets to include a return
on invested capital1 (ROIC) goal. As a result of our rapidly
improving profitability and capital efficient operating and real estate
strategies, we are now forecasting ROIC in excess of 30% by fiscal 2021,
an increase from 22% expected in fiscal 2018 and 10% in fiscal 2017

We see a clear path to $4 to $5 billion in North American revenues
long-term. We also believe there is tremendous potential for the RH
brand internationally, and we continue to explore opportunities to open
our first Gallery in London.

As communicated, we will continue to focus on executing our new business
model, architecting a new operating platform and driving significant
cash flow by increasing revenues and earnings, while decreasing
inventory and capital spending.

We expect revenues to accelerate into the second quarter and through the
second half of 2018 as we cycle last year’s inventory optimization
efforts. Additionally, the new RH Interiors and RH Modern Source Books
have been arriving in customer’s homes over the past several weeks. We
expect to benefit from the introduction of several innovative new
collections, and the incremental customer contact this year of RH
Interiors in the Spring and RH Modern in the Fall.

RH President, Chief Operating, Service and Values Officer, DeMonty Price
and his team are leading a movement within the Company to build an
operating platform and customer culture that will leapfrog us far beyond
the customer experience and operating results that currently define our
industry.

DeMonty has infused the Supply Chain and Call Center organizations with
dynamic new leadership from our Gallery teams. New Senior Vice President
of Customer Delight Centers, Sandy Pilon, a 10 year RH veteran, and new
Vice President of Home Delivery & Delight, Stefan Duban, a 17 year RH
veteran, are quickly shifting the focus from orders to customers, and
from deliveries to delight. They are infusing their teams with an energy
and passion that is echoing throughout our Company and into the homes of
our customers.

The work in home delivery includes a complete redesign of the network
which will significantly increase the time product remains in its
original packaging, reducing returns and damages, and in the majority of
our markets, doubling the productivity of our delivery teams. We are
also redesigning our call center network, closing a call center in
Dallas, and opening a new Customer Delight Center at our headquarters in
Corte Madera, CA ensuring the voice of the customer rings through the
corridors of our corporate campus daily.

We expect our work to architect a new operating platform, inclusive of
our distribution center network redesign, the redesign of our reverse
logistics and outlet business, and the reconceptualization of our home
delivery and customer experience, will drive lower costs and inventory
levels, and higher earnings and inventory turns throughout the balance
of fiscal 2018. Looking forward, we expect our ongoing efforts to result
in a dramatically improved customer experience, continued margin
enhancement and significant cost savings over the next several years.

Regarding our balance sheet and leverage ratios, we fully expect future
cash flow will be adequate to repay the outstanding principal of our
$650 million of zero coupon convertible notes at maturity in June 2019
and June 2020, respectively. As a reminder, we purchased a bond hedge
that is designed to protect us against dilution on the 2019 notes up to
$172 per share, and up to $189 per share for the 2020 notes.

Over the last three quarters, we have substantially reduced our net debt
to trailing twelve months Adjusted EBITDA from 5x at the end the second
quarter fiscal 2017 to 3x at the end of the first quarter fiscal 2018.
Based on the continued strong financial performance of our business
driving higher Adjusted EBITDA, we are in a position to reduce this
ratio to less than 2x at the end of fiscal 2018.

The strength of our business and the reduction in leverage we have
achieved during the past three quarters puts us in a strong position to
take advantage of the positive conditions in the capital markets. We
currently have multiple financing alternatives available to us on
favorable terms that could provide us with additional financial
flexibility with respect to capital allocation.

Looking back, had we not been opportunistic in responding to the
favorable market conditions through our convertible notes financings in
2014 and 2015, we would not have been in a position to repurchase $1
billion of our stock when it was undervalued last year, which has proven
to be an excellent allocation of capital for the benefit of our
shareholders. We are regularly evaluating various low interest rate
financing alternatives and expect to follow the same opportunistic
capital allocation approach in the future regarding both sources and
uses of capital.

As we did in fiscal 2017, we will once again hold ourselves back from
adding new businesses in fiscal 2018 outside of ongoing investments in
RH Hospitality as we remain focused on optimizing the profitability of
our new operating platform. We will continue to manage the business with
a bias for earnings versus revenue growth, and will restrain ourselves
from chasing low quality sales at the expense of profitability like many
in our industry.

It remains clear to us as we witness the failures of high growth - no
profit, online pure plays and the declining operating margins of
traditional retailers who are driving an unnatural shift online, that
the complexities and costs of scaling a furniture business will favor
those who control their brand from concept to customer, offer an
immersive and inspiring physical and digital experience, and have a
superior logistics network that extends the brand into the customer’s
home. The road of endless promotions, free shipping, and a shrinking
store base is resulting in broken and unsustainable retail models. We
prefer the road less traveled by, and like Robert Frost, believe it will
make all the difference.

We plan to continue our quest to revolutionize physical retailing in
fiscal 2018 and will open four new Galleries this year in Portland
(opened in March), Nashville, Yountville, and New York, the latter three
with our integrated hospitality experience.

The Nashville Gallery is inspired by the historic architecture and
design of RH Chicago, with a central courtyard cafe that features a
soaring steel and glass atrium where you can dine under heritage olive
trees while listening to the sound of trickling fountains, enjoy a glass
of wine in our dramatic wine vaults or explore the gallery with a
handcrafted coffee drink from our barista bar. The Gallery displays full
presentations of RH Interiors, Modern, Outdoor, Baby & Child and Teen,
plus a Design Atelier to support our efforts to build the largest luxury
design firm in North America. RH Nashville opens this Friday, June 15.

With a modern steel and glass industrial structure rising up five floors
through the original historic brick facade, RH New York, the Gallery in
the Historic Meatpacking district, is an architectural masterpiece
located on what is becoming one of the most iconic corners of the city.
The 90,000 gross square feet of indoor and outdoor space is connected by
a soaring central atrium with stacked cast iron columns, a grand
staircase that features the art installation “Rain” by the renowned Los
Angeles-based artist, architect, and designer Alison Berger, and a
transparent elevator which lifts you up to a glass encased rooftop
restaurant with retractable doors that open out to a beautiful
landscaped park with all-day sunshine and incredible views of downtown
and the Freedom Tower. The Gallery also features a barista bar, an
outdoor wine terrace where you can enjoy a glass of wine or a morning
coffee, full floors of RH Interiors, Modern, Outdoor, Baby & Child and
Teen, plus an expansive Design Atelier with private presentation rooms.

RH New York provides us the rare opportunity, in arguably the most
important city in the world, to develop a ground up retail experience
like no other. Currently, our plan is to open in September pending the
city completing the infrastructure and street work that has been
massively disruptive to businesses in the neighborhood. Long-term - with
the recent opening of the Whitney Museum; the redevelopment of
Gansevoort Street where our first RH Guesthouse will open in the Summer
of 2019; the expansion of Google’s headquarters in Chelsea Market; the
multiple new buildings under development in the neighborhood; all of
which will be tied together by new beautifully landscaped Belgian brick
streets and connected by the landmark High Line - we believe our new
Gallery will become a global destination and positions RH well for
future international expansion.

RH Yountville, scheduled to open early Fall, will be an integrated
compound of food, wine, art and design. Reflective of the local culture,
and intended to engage the global luxury clientele who visit and
vacation in the Napa Valley, RH Yountville includes the Historic
Ma(i)sonry Building, which we are transforming into a two story dramatic
stone wine vault with beautiful outdoor trellis covered living rooms
that can be reserved for exclusive wine tastings from some of the
Valley’s rare and hard to acquire wines. We are finishing construction
of three new pavilions on the property, including an indoor - outdoor
restaurant with a glass roof and retractable steel and glass doors where
you will dine under heritage olive trees while listening to the sound of
trickling water from dramatic central fountains. The pavilions will be
connected by lush garden courtyards with outdoor fireplaces and walking
paths of crushed granite with bluestone pavers. Two of the new pavilions
will feature rotating artistic installations of RH Interiors and RH
Modern, plus a Design Atelier to work on design projects with our
guests. The five building compound will also include a Doughnut Vault.
This Chicago based icon from President of RH Hospitality, Brendan
Sodikoff, is consistently recognized as one of the best doughnut shops
in America. Complete with the vintage and iconic Doughnut Vault Truck,
an Instagram favorite, that will reside in our parking lot and be
cruising the local streets of Yountville on weekend mornings. RH
Yountville will be a unique and immersive brand experience, one that
will continue to position the brand as a taste, style and creative
leader in our industry.

2019 - A Pivot to High Quality, Sustainable Growth

We plan a return to our product and brand expansion strategy in 2019,
which has been on hold as we focused on our move to membership and the
architecture of our new operating platform. We have several new brand
extension plans in our development pipeline, and look forward to
unveiling them as we pivot back to growth next year.

We plan to increase our investment in RH Interior Design, with a goal of
building the leading Interior Design Firm in North America. We believe
there is a significant revenue opportunity by offering world class
design and installation services as we move the brand beyond creating
and selling products to conceptualizing and selling spaces. You will
notice the expanded presence of RH Interior Design in our RH Interiors
and RH Modern Source Books, and our IMAGINE advertising campaign in many
of the leading shelter magazines.

We have developed a new prototype Design Gallery that will enable us to
more quickly place our disruptive product assortment and immersive
retail experience into the market. The new prototype is based on key
learnings from our recent Gallery openings and will range in size from
33,000 square feet inclusive of our integrated hospitality experience to
29,000 square feet without. These new Galleries will represent our
assortments from RH Interiors, Modern, Baby & Child, Teen and Outdoor.
Due to the reduced square footage and efficient design, these new
prototypes will be more capital efficient with less time and cost risk,
but yield similar productivity. We anticipate these new Galleries will
represent approximately two thirds of our target markets and enable us
to ramp from 3 to 5 new Galleries per year, to a pace of 5 to 7 new
Galleries per year.

We will continue to develop and open larger Bespoke Design Galleries in
the top metropolitan markets, and indigenous Bespoke Galleries in the
best second home markets where the wealthy and affluent visit and
vacation. Examples include the Hamptons, Aspen, Palm Beach and the Napa
Valley, among others.

We continue to evolve from a leasing to a development model that will
reduce occupancy costs and increase our return on capital. We currently
have two projects, Yountville and Edina, under construction using this
new model, and have an additional five development projects in the
pipeline. In the case of Yountville and Edina, we expect to do a
sale-leaseback that would allow us to recoup all of our capital,
possibly more. In some cases we are pre-selling and structuring the
transaction where the capital to build the project is advanced by the
buyer during construction, which would require zero upfront capital from
RH.

Additionally, due to the productivity and proof of concept of our recent
new Galleries, we are able to negotiate capital light traditional
leasing deals, where 65% to 100% of the capital requirement will be
funded by the landlord, versus 50% previously. All of the above
mentioned deal structures lead to lower capital requirements, and
significantly higher returns on invested capital.

Building a Brand with No Peer and a Customer Experience That Cannot
Be Replicated Online

We do understand that the strategies we are pursuing - opening the
largest specialty retail experiences in our industry while most are
shrinking the size of their retail footprint or closing stores; moving
from a promotional to a membership model, while others are increasing
promotions, positioning their brands around price versus product;
continuing to mail inspiring Source Books, while many are eliminating
catalogs; and refusing to follow the herd in self-promotion on social
media, instead allowing our brand to be defined by the taste, design,
and quality of the products and experiences we are creating - are all in
direct conflict with conventional wisdom and the plans being pursued by
many in our industry.

We believe when you step back and consider: one, we are building a brand
with no peer; two, we are creating a customer experience that cannot be
replicated online; and three, we have total control of our brand from
concept to customer, you realize what we are building is extremely rare
in today’s retail landscape, and, we would argue, will also prove to be
equally valuable.

In closing, we are deeply grateful for our people and partners whose
passion and persistence bring our vision and values to life each day, as
we pursue our quest to become one of the most admired brands in the
world.

Carpe Diem,

Gary

Gary FriedmanChairman & Chief Executive Officer

1 Return on invested capital (ROIC): We define ROIC as
adjusted operating income after-tax for the most recent twelve-month
period, divided by the average of beginning and ending debt and equity
less cash and equivalents as well as short and long term investments for
the most recent twelve-month period. ROIC is not a measure of financial
performance under GAAP, and should be considered in addition to, and not
as a substitute for other financial measures prepared in accordance with
GAAP. Our method of determining ROIC may differ from other companies’
methods and therefore may not be comparable.

Q&A CONFERENCE CALL INFORMATION

Accompanying this release, RH leadership will host a live question and
answer conference call at 2:00 p.m. PT (5:00 p.m. ET). Interested
parties may access the call by dialing (866) 394-6658 (United
States/Canada) or (706) 679-9188 (International). A live broadcast of
the question and answer session conference call will also be available
online at the Company’s investor relations website, ir.rh.com.
A replay of the question and answer session conference call will be
available through June 25, 2018 by dialing (855) 859-2056 or (404)
537-3406 and entering passcode 1575188, as well as on the Company’s
investor relations website.

ABOUT RH

RH (NYSE:RH) is a curator of design, taste and style in the luxury
lifestyle market. The Company offers collections through its retail
galleries, Source Books, and online at RH.com, RHModern.com and
Waterworks.com.

NON-GAAP FINANCIAL MEASURES

To supplement its condensed consolidated financial statements, which are
prepared and presented in accordance with Generally Accepted Accounting
Principles (“GAAP”), the Company uses the following non-GAAP financial
measures: adjusted net revenue, adjusted net income, adjusted diluted
earnings per share, free cash flow, adjusted operating margin and
Adjusted EBITDA (collectively, “non-GAAP financial measures”). We
compute these measures by adjusting the applicable GAAP measures to
remove the impact of certain recurring and non-recurring charges and
gains and the tax effect of these adjustments. The presentation of this
financial information is not intended to be considered in isolation or
as a substitute for, or superior to, the financial information prepared
and presented in accordance with GAAP. The Company uses these non-GAAP
financial measures for financial and operational decision making and as
a means to evaluate period-to-period comparisons. The Company believes
that they provide useful information about operating results, enhance
the overall understanding of past financial performance and future
prospects, and allow for greater transparency with respect to key
metrics used by management in its financial and operational decision
making. The non-GAAP financial measures used by the Company in this
press release may be different from the non-GAAP financial measures,
including similarly titled measures, used by other companies.

For more information on the non-GAAP financial measures, please see the
Reconciliation of GAAP to non-GAAP Financial Measures tables in this
press release. These accompanying tables include details on the GAAP
financial measures that are most directly comparable to non-GAAP
financial measures and the related reconciliations between these
financial measures.

FORWARD-LOOKING STATEMENTS

This release contains forward-looking statements within the meaning of
the federal securities laws, including without limitation statements
related to: our future financial and business outlook and guidance for
the second, third and fourth quarters of fiscal 2018 and for the fiscal
year 2018 as well as for intermediate and long term timeframes,
including our guidance and outlook with respect to revenues, adjusted
net income, adjusted diluted earnings per share, adjusted gross margin,
capital expenditures, merchandise inventories, free cash flow, adjusted
operating margin, anticipated diluted shares outstanding and net revenue
growth, ration of net total debt to trailing twelve months Adjusted
EBITDA; our focus on managing the business with a bias for earnings
versus revenue growth in 2018; our belief that we are building a
massively more efficient operating platform that will enable us to
compete and win over the long-term; our belief that our work this past
year to consolidate our distribution center network from four facilities
to two, while streamlining operations throughout our supply chain, has
resulted in a significantly more efficient cost and working capital
model and that this new model will prove to be a long-term competitive
advantage that will separate and distinguish RH’s operating results for
years to come; our expectations for accelerated revenue growth and
continued margin expansion with line of sight to adjusted operating
margins in the low-to-mid teens by 2021, including by cycling the
start-up costs from RH Hospitality of approximately 50 - 70 basis,
neutralizing the earnings drag from Waterworks of approximately 40 - 60
basis points, cost savings and margin enhancement from our new operating
platform of approximately 150 - 200 basis points and gross margin
expansion and selling, general and administrative expense leverage from
our real estate transformation of approximately 150 - 200 basis points;
our forecast of ROIC in excess of 30% by fiscal 2021, an increase from
22% expected in fiscal 2018, as a result of our rapidly improving
profitability, and capital efficient operating and real estate
strategies; our focus on executing our new business model, architecting
a new operating platform and driving significant cash flow by increasing
revenues and earnings, while decreasing inventory and capital spending;
our expectation that revenues will accelerate into the second quarter
and through the second half of 2018 as we cycle last year’s inventory
optimization efforts; our expectation that we will benefit from the
introduction of several innovative new collections and the incremental
customer contact this year of RH Interiors in the Spring and RH Modern
in the Fall; our belief that we are building an operating platform and
customer culture that will leapfrog us far beyond the customer
experience and operating results that currently define our industry; our
expectation that our complete redesign of our home delivery network will
significantly increase the time product remains in its original
packaging, reduce returns and damages, and in the majority of our
markets, double the productivity of our delivery teams; our plan to
redesign our customer care center network, including closing a care
center in Dallas and opening a new care center at our headquarters in
Corte Madera, CA; our expectation that our work to architect a new
operating platform, inclusive of our distribution center network
redesign, the redesign of our reverse logistics and outlet business, and
the reconceptualization of our home delivery and customer experience,
will drive lower costs and inventory levels, and higher earnings and
inventory turns throughout the balance of fiscal 2018; our expectation
that future cash flow will be adequate to repay the outstanding
principal balance of our $650 million of zero coupon convertible notes
due in June 2019 and June 2020; our belief that, based on the continued
strong financial performance of our business, we are in a position to
reduce the ratio of net debt to trailing twelve month Adjusted EBITDA to
less than 2x at the end of fiscal 2018; our belief that the strength of
our business and the reduction in leverage we have achieved during the
past three quarters puts us in a strong position to take advantage of
the positive conditions in the capital markets and that we currently
have multiple financing alternatives available to us on favorable terms
that could provide us with additional financial flexibility with respect
to capital allocation; our belief that our stock repurchases in fiscal
2017 has proven to be an excellent allocation of capital for the benefit
of our shareholders and our expectation to follow the same opportunistic
capital allocation approach in the future regarding both sources and
uses of capital; our plan to make ongoing investments in RH Hospitality
in fiscal 2018; our plan to open new Galleries in Nashville on June 15,
2018, in September in New York pending the city completing
infrastructure and street work and in early fall in Yountville; the
product assortment and integrated hospitality experience to be presented
at such new Galleries and the anticipated customer experience at such
new Galleries; our expectation to open our first RH Guesthouse in New
York in the Summer of 2019; our expectations concerning product and
business expansion beginning in 2019; our plans regarding our new
prototype Design Gallery including our expectations regarding its
capital efficiency, timing, cost risk and productivity and representing
approximately two thirds of our target markets; our objective to
increase the pace of new Gallery openings from 3 to 5 per year to 5 to 7
per year; our plans to develop and open larger Bespoke Design Galleries;
our plan to move from a leasing to a development model, our five
projects in the development pipeline beyond Yountville and Edina, and
our expectation that this model will reduce occupancy costs and increase
our return on capital; our expectation that we will be able to negotiate
capital light traditional leasing deals, where we expect that 65% to
100% of the capital requirement will be funded by the landlord, versus
50% previously; our potential for the RH brand internationally and our
opportunities to open a Gallery in London; any financial or operational
factors or results that are described as short term, one-time,
non-recurring or unusual (as similar operational or financial factors
may adversely affect the Company’s future results including as a result
of charges, costs and other items that may occur in one or more
subsequent financial reporting periods); and any statements or
assumptions underlying any of the foregoing. You can identify
forward-looking statements by the fact that they do not relate strictly
to historical or current facts. These statements may include words such
as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,”
“believe,” “may,” “will,” “should,” “likely” and other words and terms
of similar meaning in connection with any discussion of the timing or
nature of future events. We cannot assure you that future developments
affecting us will be those that we have anticipated. Important risks and
uncertainties that could cause actual results to differ materially from
our expectations or the assumptions set forth in this release include,
among others, our ability to retain key personnel; successful
implementation of our growth strategy; our ability to leverage
Waterworks; uncertainties in the current performance of our business
including a range of risks related to our operations as well as external
economic factors; general economic conditions and the impact on consumer
confidence and spending; changes in customer demand for our products;
our decisions concerning the allocation of capital; decisions concerning
the allocation of capital including the extent to which we repurchase
additional shares of our common stock which will affect shares
outstanding and EPS; factors affecting our outstanding convertible
senior notes or other forms of our indebtedness; our ability to
anticipate consumer preferences and buying trends, and maintaining our
brand promise to customers; changes in consumer spending based on
weather and other conditions beyond our control; risks related to the
number of new business initiatives we are undertaking; strikes and work
stoppages affecting port workers and other industries involved in the
transportation of our products; our ability to obtain our products in a
timely fashion or in the quantities required; our ability to employ
reasonable and appropriate security measures to protect personal
information that we collect; our ability to support our growth with
appropriate information technology systems; risks related to “conflict
minerals” compliance and its impact on sourcing, if any, as well as
those risks and uncertainties disclosed under the sections entitled
“Risk Factors” and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in RH’s most recent Form 10-K and
Form 10-Q filed with the Securities and Exchange Commission, and similar
disclosures in subsequent reports filed with the SEC, which are
available on our investor relations website at ir.rh.com
and on the SEC website at www.sec.gov.
Any forward-looking statement made by us in this press release speaks
only as of the date on which we make it. We undertake no obligation to
publicly update any forward-looking statement, whether as a result of
new information, future developments or otherwise, except as may be
required by any applicable securities laws.

RH

REVENUE METRICS

(Unaudited)

Three Months Ended

May 5,2018

April 29,2017

Stores as a percentage of net revenues [a]

56

%

56

%

Direct as a percentage of net revenues

44

%

44

%

Growth in net revenues:

Stores [a]

(1

)%

24

%

Direct

(1

)%

23

%

Total

(1

)%

23

%

Comparable brand revenue growth

1

%

9

%

See the Company’s most recent Form 10-K and Form 10-Q filings for
the definitions of stores, direct, and comparable brand revenue.

[a]

Stores data represents sales originating in retail stores, including
Waterworks showrooms, and outlet stores. Net revenues for outlet
stores, which include warehouse sales, were $43.2 million and $56.1
million for the three months ended May 5, 2018 and April 29, 2017,
respectively.

RHRETAIL GALLERY METRICS(Unaudited)

As of May 5, 2018, the Company operated a total of 84 retail Galleries
consisting of 17 Design Galleries, 46 legacy Galleries, 2 RH Modern
Galleries and 4 RH Baby & Child Galleries throughout the United States
and Canada, and 15 Waterworks showrooms throughout the United States and
in the U.K. This compares to a total of 85 retail Galleries consisting
of 14 Design Galleries, 50 legacy Galleries, 1 RH Modern Gallery and 5
RH Baby & Child Galleries throughout the United States and Canada, and
15 Waterworks showrooms throughout the United States and in the U.K., as
of April 29, 2017.

In addition, as of May 5, 2018, the Company operated 32 outlet stores
compared to 28 as of April 29, 2017.

Three Months Ended

May 5,2018

April 29,2017

Store Count

Total Leased SellingSquare Footage

Store Count

Total Leased SellingSquare Footage

(in thousands)

(in thousands)

Beginning of period

83

981

85

912

Retail Galleries opened:

Portland Design Gallery

1

26.0

—

—

RH Modern Dallas

1

8.2

—

—

Waterworks Scottsdale Showroom

1

2.2

—

—

Retail Galleries closed:

Portland legacy Gallery

(1

)

(4.7

)

—

—

Waterworks Scottsdale Showroom

(1

)

(1.1

)

—

—

End of period

84

1,012

85

912

Weighted-average leased selling square footage

984

912

% Growth year over year

8

%

26

%

See the Company’s most recent Form 10-K and Form 10-Q filings for square
footage definitions.Total leased square footage as of May 5, 2018
and April 29, 2017 was 1,358,000 and 1,242,000, respectively.Weighted-average
leased square footage for the three months ended May 5, 2018 and April
29, 2017 was 1,323,000 and 1,242,000, respectively.Retail sales
per leased selling square foot for the three months ended May 5, 2018
and April 29, 2017 was $275 and $284, respectively.

RH

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

(Unaudited)

Three Months Ended

May 5,

2018

% of Net

Revenues

April 29,

2017

% of Net

Revenues

Net revenues

$

557,406

100.0

%

$

562,080

100.0

%

Cost of goods sold

345,371

62.0

%

391,824

69.7

%

Gross profit

212,035

38.0

%

170,256

30.3

%

Selling, general and administrative expenses

158,434

28.4

%

163,360

29.1

%

Income from operations

53,601

9.6

%

6,896

1.2

%

Interest expense—net

17,035

3.1

%

12,179

2.1

%

Income (loss) before income taxes

36,566

6.5

%

(5,283

)

(0.9

)%

Income tax expense (benefit)

8,507

1.5

%

(1,913

)

(0.3

)%

Net income (loss)

$

28,059

5.0

%

$

(3,370

)

(0.6

)%

Weighted-average shares used in computing basic

net income (loss) per share

21,545,025

37,609,516

Basic net income (loss) per share

$

1.30

$

(0.09

)

Weighted-average shares used in computing diluted

net income (loss) per share

25,230,228

37,609,516

Diluted net income (loss) per share

$

1.11

$

(0.09

)

RH

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

May 5,2018

February 3,2018

April 29,2017

ASSETS

Cash and cash equivalents

$

20,796

$

17,907

$

80,150

Merchandise inventories

530,657

527,026

683,984

Asset held for sale

—

—

8,179

Other current assets

98,678

99,997

142,357

Total current assets

650,131

644,930

914,670

Property and equipment—net

811,369

800,698

702,741

Goodwill and intangible assets

242,527

242,595

274,892

Other non-current assets

44,934

44,643

56,083

Total assets

$

1,748,961

$

1,732,866

$

1,948,386

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

Liabilities

Accounts payable and accrued expenses

$

264,173

$

318,765

$

233,395

Deferred revenue, customer deposits and other current liabilities

232,323

200,570

210,526

Total current liabilities

496,496

519,335

443,921

Asset based credit facility

219,000

199,970

—

Term loan—net

79,528

79,499

—

Convertible senior notes due 2019—net

331,678

327,731

316,153

Convertible senior notes due 2020—net

257,425

252,994

240,120

Financing obligations under build-to-suit lease transactions

227,979

229,323

220,019

Other non-current obligations

128,213

131,350

105,395

Total liabilities

1,740,319

1,740,202

1,325,608

Stockholders’ equity (deficit)

8,642

(7,336

)

622,778

Total liabilities and stockholders’ equity (deficit)

$

1,748,961

$

1,732,866

$

1,948,386

RH

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

Three Months Ended

May 5,2018

April 29,2017

CASH FLOWS FROM OPERATING ACTIVITIES

Net income (loss)

$

28,059

$

(3,370

)

Adjustments to reconcile net income (loss) to net cash provided by
operating activities:

End of period—cash and cash equivalents and restricted cash
equivalents

$

25,329

$

104,283

RH

CALCULATION OF FREE CASH FLOW

(In thousands)

(Unaudited)

Three Months Ended

May 5,2018

April 29,2017

Net cash provided by operating activities

$

5,315

$

125,055

Capital expenditures

(27,121

)

(21,173

)

Payments on build-to-suit lease transactions

(3,207

)

(1,289

)

Payments on capital leases

(112

)

(76

)

Proceeds from sale of assets held for sale—net

—

4,900

Free cash flow [a]

$

(25,125

)

$

107,417

[a]

Free cash flow is calculated as net cash provided by operating
activities and net proceeds from sale of assets held for sale, less
capital expenditures, payments on build-to-suit lease transactions
and payments on capital leases. Free cash flow excludes all non-cash
items, such as the non-cash additions of property and equipment due
to build-to-suit lease transactions. Free cash flow is included in
this press release because management believes that free cash flow
provides meaningful supplemental information for investors regarding
the performance of our business and facilitates a meaningful
evaluation of operating results on a comparable basis with
historical results. Our management uses this non-GAAP financial
measure in order to have comparable financial results to analyze
changes in our underlying business from quarter to quarter.

RH

RECONCILIATION OF GAAP NET INCOME (LOSS) TO ADJUSTED NET INCOME

(In thousands)

(Unaudited)

Three Months Ended

May 5,2018

April 29,2017

GAAP net income (loss)

$

28,059

$

(3,370

)

Adjustments (pre-tax):

Cost of goods sold:

Impact of inventory step-up [a]

190

1,380

Recall accrual [b]

(254

)

—

Selling, general and administrative expenses:

Post-acquisition related legal costs [c]

1,915

—

Distribution center closures [d]

(2,072

)

—

Interest expense—net:

Amortization of debt discount [e]

7,272

6,715

Subtotal adjusted items

7,051

8,095

Impact of income tax on adjusted items [f]

(1,656

)

(2,931

)

Adjusted net income [g]

$

33,454

$

1,794

[a]

Represents the non-cash amortization of the inventory fair value
adjustment recorded in connection with our acquisition of Waterworks.

[b]

Represents an adjustment related to certain product recalls.

[c]

Represents legal expenses incurred in connection with the final
purchase price of Waterworks.

[d]

Represents an adjustment to the lease related liability associated
with the Dallas distribution center closure in fiscal 2017,
primarily due to the remeasurement of the liability for lease losses
resulting from a sublease agreement we entered into in April 2018
that resulted in an update to both the timing and the term of future
lease-related cash inflows.

[e]

Under GAAP, certain convertible debt instruments that may be settled
in cash on conversion are required to be separately accounted for as
liability and equity components of the instrument in a manner that
reflects the issuer’s non-convertible debt borrowing rate.
Accordingly, in accounting for GAAP purposes for the $350 million
aggregate principal amount of convertible senior notes that were
issued in June 2014 (the “2019 Notes”) and for the $300 million
aggregate principal amount of convertible senior notes that were
issued in June and July 2015 (the “2020 Notes”), we separated the
2019 Notes and 2020 Notes into liability (debt) and equity
(conversion option) components and we are amortizing as debt
discount an amount equal to the fair value of the equity components
as interest expense on the 2019 Notes and 2020 Notes over their
respective terms. The equity components represent the difference
between the proceeds from the issuance of the 2019 Notes and 2020
Notes and the fair value of the liability components of the 2019
Notes and 2020 Notes, respectively. Amounts are presented net of
interest capitalized for capital projects of $0.6 million and $0.7
million during the three months ended May 5, 2018 and April 29,
2017, respectively.

[f]

The adjustments for the three months ended May 5, 2018 and April 29,
2017 represent the tax effect of the adjusted items based on our
effective tax rates of 23.3% and 36.2%, respectively.

[g]

Adjusted net income is a supplemental measure of financial
performance that is not required by, or presented in accordance
with, GAAP. We define adjusted net income as net income (loss),
adjusted for the impact of certain non-recurring and other items
that we do not consider representative of our underlying operating
performance. Adjusted net income is included in this press release
because management believes that adjusted net income provides
meaningful supplemental information for investors regarding the
performance of our business and facilitates a meaningful evaluation
of actual results on a comparable basis with historical results. Our
management uses this non-GAAP financial measure in order to have
comparable financial results to analyze changes in our underlying
business from quarter to quarter.

RH

RECONCILIATION OF DILUTED NET INCOME (LOSS) PER SHARE TO

ADJUSTED DILUTED NET INCOME PER SHARE

(Unaudited)

Three Months Ended

May 5,

2018

April 29,

2017

Diluted net income (loss) per share

$

1.11

$

(0.09

)

Pro forma diluted net income (loss) per share [a]

$

1.11

$

(0.09

)

EPS impact of adjustments (pre-tax) [b]:

Amortization of debt discount

0.29

0.18

Post-acquisition related legal costs

0.08

—

Impact of inventory step-up

0.01

0.04

Distribution center closures

(0.08

)

—

Recall accrual

(0.01

)

—

Subtotal adjusted items

0.29

0.22

Impact of income tax items [b]

(0.07

)

(0.08

)

Adjusted diluted net income per share [c]

$

1.33

$

0.05

[a]

Pro forma diluted net loss per share for the three months ended
April 29, 2017 is calculated based on GAAP net loss and diluted
weighted-average shares of 37,879,107.

[b]

Refer to table titled “Reconciliation of GAAP Net Income (Loss) to
Adjusted Net Income” and the related footnotes for additional
information.

[c]

Adjusted diluted net income per share is a supplemental measure of
financial performance that is not required by, or presented in
accordance with, GAAP. We define adjusted diluted net income per
share as net income (loss), adjusted for the impact of certain
non-recurring and other items that we do not consider representative
of our underlying operating performance divided by the Company’s
share count. Adjusted diluted net income per share is included in
this press release because management believes that adjusted diluted
net income per share provides meaningful supplemental information
for investors regarding the performance of our business and
facilitates a meaningful evaluation of operating results on a
comparable basis with historical results. Our management uses this
non-GAAP financial measure in order to have comparable financial
results to analyze changes in our underlying business from quarter
to quarter.

RH

RECONCILIATION OF GROSS PROFIT TO ADJUSTED GROSS PROFIT

(In thousands)

(Unaudited)

Three Months Ended

May 5,2018

April 29,2017

Gross profit

$

212,035

$

170,256

Impact of inventory step-up [a]

190

1,380

Recall accrual [a]

(254

)

—

Adjusted gross profit [b]

$

211,971

$

171,636

Net revenues

$

557,406

$

562,080

Gross margin [c]

38.0

%

30.3

%

Adjusted gross margin [c]

38.0

%

30.5

%

[a]

Refer to table titled “Reconciliation of GAAP Net Income (Loss) to
Adjusted Net Income” and the related footnotes for additional
information.

[b]

Adjusted gross profit is a supplemental measure of financial
performance that is not required by, or presented in accordance
with, GAAP. We define adjusted gross profit as gross profit,
adjusted for the impact of certain non-recurring and other items
that we do not consider representative of our underlying operating
performance. Adjusted gross profit is included in this press release
because management believes that adjusted gross profit provides
meaningful supplemental information for investors regarding the
performance of our business and facilitates a meaningful evaluation
of operating results on a comparable basis with historical results.
Our management uses this non-GAAP financial measure in order to have
comparable financial results to analyze changes in our underlying
business from quarter to quarter.

Refer to table titled “Reconciliation of GAAP Net Income (Loss) to
Adjusted Net Income” and the related footnotes for additional
information.

[b]

Adjusted operating income is a supplemental measure of financial
performance that is not required by, or presented in accordance
with, GAAP. We define adjusted operating income as operating income,
adjusted for the impact of certain non-recurring and other items
that we do not consider representative of our underlying operating
performance. Adjusted operating income is included in this press
release because management believes that adjusted operating income
provides meaningful supplemental information for investors regarding
the performance of our business and facilitates a meaningful
evaluation of operating results on a comparable basis with
historical results. Our management uses this non-GAAP financial
measure in order to have comparable financial results to analyze
changes in our underlying business from quarter to quarter.

[c]

Operating margin is defined as operating income divided by net
revenues. Adjusted operating margin is defined as adjusted operating
income divided by net revenues.

RH

RECONCILIATION OF NET INCOME (LOSS) TO EBITDA AND ADJUSTED
EBITDA

(In thousands)

(Unaudited)

Three Months Ended

May 5,2018

April 29,2017

Net income (loss)

$

28,059

$

(3,370

)

Depreciation and amortization

17,047

16,020

Interest expense—net

17,035

12,179

Income tax expense (benefit)

8,507

(1,913

)

EBITDA [a]

70,648

22,916

Non-cash compensation [b]

7,997

5,289

Post-acquisition related legal costs [c]

1,915

—

Impact of inventory step-up [c]

190

1,380

Distribution center closures [c]

(2,072

)

—

Recall accrual [c]

(254

)

—

Adjusted EBITDA [a]

$

78,424

$

29,585

[a]

EBITDA and Adjusted EBITDA are supplemental measures of financial
performance that are not required by, or presented in accordance
with, GAAP. We define EBITDA as consolidated net income (loss)
before depreciation and amortization, interest expense and provision
for income taxes. Adjusted EBITDA reflects further adjustments to
EBITDA to eliminate the impact of non-cash compensation, as well as
certain non-recurring and other items that we do not consider
representative of our underlying operating performance. EBITDA and
Adjusted EBITDA are included in this press release because
management believes that these metrics provide meaningful
supplemental information for investors regarding the performance of
our business and facilitate a meaningful evaluation of operating
results on a comparable basis with historical results. Our
management uses this non-GAAP financial measure in order to have
comparable financial results to analyze changes in our underlying
business from quarter to quarter. Our measures of EBITDA and
Adjusted EBITDA are not necessarily comparable to other similarly
titled captions for other companies due to different methods of
calculation.

Represents property and equipment disposals, lease related charges,
inventory transfer costs, severance expense and other costs
associated with two distribution center closures, which were
completed in November 2017 and January 2018.

[g]

Represents legal expenses incurred in connection with the final
purchase price of Waterworks.

[h]

Represents the non-cash amortization of the inventory fair value
adjustment recorded in connection with our acquisition of Waterworks.

[i]

Represents the release of the remaining reserve for potential claims
regarding anti-dumping duties which we believe have lapsed. The
reserve related to potential tariff obligations of one of our
foreign suppliers following the U.S. Department of Commerce’s review
on the anti-dumping duty order on wooden bedroom furniture from
China for the period from January 1, 2011 through December 31, 2011.

[j]

Represents the gain on the sale of building and land of one of our
owned retail Galleries.

[k]

Represents the impairment recorded upon reclassification of aircraft
as asset held for sale.

[l]

Represents costs associated with a reorganization, which include
severance costs and related taxes, partially offset by a reversal of
stock-based compensation expense related to unvested equity awards.

[m]

Refer to footnote [a] within table titled “Reconciliation of Net
Income (Loss) to EBITDA and Adjusted EBITDA.”

RHTOPIC 606 IMPACT OF ADOPTION(In thousands)(Unaudited)

We adopted ASU 2014-09 (“Topic 606”), which pertains to revenue
recognition, on February 4, 2018.

The adoption of Topic 606 had the most material impact on the timing of
advertising expense recognition related to direct response advertising,
including costs associated with the Company’s Source Books. Under Topic
606, the Company will recognize expense associated with the Source Books
upon the delivery of the Source Books to the carrier. Prior to adoption
of Topic 606, costs associated with Source Books were capitalized and
amortized over their expected period of future benefit.

Three Months Ended May 5, 2018

As Reported

% of NetRevenues

Topic 606Adjustments

Balances withoutAdoption of Topic 606

% of NetRevenues

Net revenues [a]

$

557,406

100.0

%

$

(7,610

)

$

549,796

100.0

%

Cost of goods sold [b]

345,371

62.0

%

(2,988

)

342,383

62.3

%

Gross profit

212,035

38.0

%

(4,622

)

207,413

37.7

%

Selling, general and administrative expenses [c]

158,434

28.4

%

3,803

162,237

29.5

%

Income from operations

53,601

9.6

%

(8,425

)

45,176

8.2

%

Interest expense—net

17,035

3.1

%

—

17,035

3.1

%

Income before income taxes

36,566

6.5

%

(8,425

)

28,141

5.1

%

Income tax expense [d]

8,507

1.5

%

(1,950

)

6,557

1.2

%

Net income

$

28,059

5.0

%

$

(6,475

)

$

21,584

3.9

%

[a]

Adjustment to net revenues includes (i) $6.7 million associated with
deferred revenue, (ii) $0.5 million associated with incentive
payment amortization and (iii) $0.4 million associated with gift
card breakage.

[b]

Adjustment to costs of goods sold represents deferred cost of goods
sold of $2.5 million and the impact of related shipping expenses of
$0.5 million.

[c]

Adjustment to selling, general and administrative expenses include a
$4.9 million increase in advertising expense, partially offset by
gift card breakage of $0.6 million and incentive payment
amortization of $0.5 million.

[d]

Adjustment to income tax expense represents the tax effect of the
adjustments based on our effective tax rate of 23.3%.

The following table summarizes the impact of adopting Topic 606 on our
condensed consolidated balance sheet:

As of May 5, 2018

As Reported

Topic 606Adjustments

Balances withoutAdoption of Topic 606

Other current assets

$

98,678

$

27,652

$

126,330

Other non-current assets

44,934

(6,561

)

38,373

Accounts payable and accrued expenses

264,173

(638

)

263,535

Deferred revenue, customer deposits and other current liabilities

232,323

7,168

239,491

Stockholders’ equity

8,642

14,561

23,203

RH

FISCAL 2018 GUIDANCE BY QUARTER

(In millions, except per share data)

The Company is providing the following outlook for fiscal 2018:

First Quarter2018

Second Quarter2018

Third Quarter2018

Fourth Quarter2018

Fiscal Year2018

Adjusted net revenues

$557.4 [a]

$655 - $662

$640 - $652

$678 - $699

$2,530 - $2,570

% growth vs. prior year

(1)%

6% - 7%

8% - 10%

8% - 11% [b]

5% - 7% [b]

Adjusted gross margin (% of net revenues)

38.0%

40.5% - 40.7%

39.5% - 40.0%

39.0% - 39.5%

39.3% - 39.6%

Adjusted SG&A (as % of net revenues)

28.5% [a]

29.6% - 29.8%

31.6% - 32.0%

25.1% - 25.5%

28.6% - 28.9%

Adjusted operating margin (% of net revenues)

9.6%

10.8% - 11.1%

7.5% - 8.4%

13.5% - 14.4%

10.4% - 11.0%

Adjusted net income

$33.5

$45 - $47

$28 - $33

$61 - $67

$168 - $181

Adjusted diluted EPS

$1.33

$1.70 - $1.77

$1.04 - $1.23

$2.16 - $2.39

$6.34 - $6.83

[a] First quarter net revenues and SG&A as a percentage of net
revenues are both shown on a GAAP basis.

[b] On comparable 13-week to 13-week basis for fourth quarter 2018
and 52-week to 52-week basis for fiscal 2018. The extra week added
approximately $42.6 million to fiscal 2017 net revenues.

Note: The Company’s adjusted net income does not include certain
charges and costs. The adjustments to net revenues, gross margin,
selling, general and administrative expenses, operating income,
operating margin and net income in future periods are generally
expected to be similar to the kinds of charges and costs excluded
from such non-GAAP financial measures in prior periods, such as
unusual non-cash and other compensation expense; one-time income tax
expense or benefits; legal claim related expenses; recall accruals;
reorganization costs including severance costs and related taxes;
non-cash amortization of debt discount; and charges and costs in
connection with the acquisition of Waterworks, among others. The
exclusion of these charges and costs in future periods will have a
significant impact on the Company’s adjusted net revenues, adjusted
gross margin, adjusted selling, general and administrative expenses,
adjusted operating income, adjusted operating margin and adjusted
net income. The Company is not able to provide a reconciliation of
the Company’s non-GAAP financial guidance to the corresponding GAAP
measures without unreasonable effort because of the uncertainty and
variability of the nature and amount of these future charges and
costs.

Note: The table above is intended to demonstrate the impact of
increasing stock prices on our adjusted diluted shares outstanding
due to 1) additional in-the-money options and 2) the higher cost
of acquired shares under the treasury stock method.

For GAAP purposes, we will incur dilution above the lower strike
prices of our 2019 and 2020 convertible notes of $116.09 and
$118.13, respectively. However, no additional shares will be
included in our Adjusted Diluted Shares Outstanding calculation
between $116.09 and $171.98 for our 2019 convertible notes, and
between $118.13 and $189.00 for our 2020 convertible notes, based
on the bond hedge contracts in place that will deliver shares to
offset dilution in these ranges. At stock prices in excess of
$171.98 and $189.00, we will incur dilution related to the 2019
convertible notes and 2020 convertible notes, respectively, and
our obligation to deliver additional shares in excess of the
dilution protection provided by the bond hedges.

The calculation also includes assumptions around the timing and
number of options exercises. Actual diluted shares outstanding may
differ if actual exercises differ from estimates. The stock option
awards outstanding for RH’s Chairman and CEO are included in all
of the adjusted diluted shares outstanding scenarios above based
on the exercise prices of $46.50, $75.43 and $50.00 for the
November 2012, July 2013 and May 2017 grants, respectively.

[a]

Includes 0.134 million and 0.562 million incremental shares at
$180.00 and $200.00 average share price, respectively, due to
dilution from the convertible notes.